An Ontario judge has ruled that accounting regulators can pursue disciplinary action against former Sino-Forest Corp. chief financial officer David Horsley, who is facing a possible two-year suspension from working as an accountant.
Mr. Horsley argued that the Chartered Professional Accountants of Ontario (CPAO) should not be allowed to hold a hearing in his case because he is sheltered from all further legal action under the terms of settlement deals he reached in securities matters following the forestry company's collapse.
However, Justice Geoffrey Morawetz of the Ontario Superior Court ruled the CPAO's claims "are not, and were never intended to be," covered by restrictions negotiated in settlement deals with the Ontario Securities Commission and in shareholder class-action claims.
Mr. Horsley's shareholder settlement was approved by the court in 2014 while Sino-Forest was operating under bankruptcy protection under the Companies' Creditors Arrangement Act.
Justice Morawetz added that allowing the settlement provisions to be so broadly defined "would give rise to an absurdity – an interpretation that must be avoided."
The CPAO filed allegations against Mr. Horsley in May, 2015, claiming he "failed to maintain the good reputation of the profession" and "failed to perform his professional services with due care" while working at Sino-Forest. The regulatory body said it is seeking to suspend Mr. Horsley for two years and impose a $75,000 fine.
Mr. Horsley argued that the CPAO's hearing could not proceed in his case because he is sheltered from all future legal cases under court-approved settlement agreements, including claims from all regulatory bodies such as the CPAO.
However, Justice Morawetz said the CPAO's claims of professional misconduct are not claims against Mr. Horsley in his capacity as an officer or director of Sino-Forest, but in his role as a chartered accountant, so are not covered under his settlement terms.
Mr. Horsley also did not notify the accounting regulator in 2014 that he was negotiating settlement agreements that he believed would bar CPAO claims, Justice Morawetz said, even though he had already spoken to the CPAO about disciplinary matters at that time.
The CPAO said it would have requested to be explicitly excluded from the settlements if it had been notified that it would be bound by their terms.
"The settlement order is clear," Justice Morawetz ruled in his decision, which is dated Feb. 19. "The settlement order binds parties and entities who had notice of the motion. CPAO did not receive notice and, in my view, are not bound by it."
Sino-Forest, which bought and sold timber rights in China, collapsed in 2011 after a short seller alleged it did not own all of the timber rights it claimed. The company once had a market capitalization of $6-billion on the Toronto Stock Exchange.
The OSC accused most of the company's senior staff of participating in a scheme to falsely inflate the company's assets and revenue.
Mr. Horsley was not accused of knowing about or participating in fraudulent activity, however. He reached a settlement with the OSC in 2014, admitting that his lack of knowledge of the company's business and absence of due diligence allowed the company to make "materially misleading disclosures" to investors.
Mr. Horsley was ordered to pay a $700,000 penalty and separately promised to pay $5.6-million to Sino-Forest investors under a class-action settlement. The OSC has permanently banned him from acting as a director or officer of a public company.